For this article we’re going to assume that you’ve found a supplier or have a product in mind to sell. Now the question that almost every entrepreneur has asked is “What am I going to charge for my products?”.
Pricing at first glance, like many things in business, seems relatively simple. You set a price, people like the product, they pay it and that goes to your business. For better or worse, it’s not so simple. These questions amongst others should be answered before setting anything in stone. We have to take into account various factors including:
- Who are your main competitors?
- What are they pricing similar or the same products at?
- Are they running sales or discounts?
- Is the product(s) a luxury item or have an emotional connection or not?
- How saturated (or niche) is the market?
- What does your target audience normally spend on a similar product?
- Do you offer anything above and beyond your competitors? E.g. free returns, personalised service, extended warranties, more choice, free shipping, etc.
- What are your projected overheads?
- How much does the product(s) cost you to buy in?
Cost Based Pricing:
Probably the easiest pricing strategy is to simply work out how much your product costs to buy in and set a desired markup amount or percentage. So if you buy your product in for £25 and want a 75% markup, then we need to do:
Cost + (Cost x Markup %) = Retail Price
20 + (20 x 0.75) = £35.
Note that a markup is different to a margin. Markup is a set amount or percentage on top of the product cost. Margin is the gross profit left after the cost is taken out. For our example the profit margin would be 42%.
For more on profit margins check out our resource article here.
A vast amount of retailers ascribe to this pricing which traditionally gives a 50% Profit margin to a product’s cost by doubling the wholesale cost or purchase cost.
Cost x 2 = Retail Price
10 x 2 = £20.
This gives you as a retailer a 100% Markup and a 50% Profit Margin. It’s simple, clear and a widely accepted pricing strategy.
Some people may think this is daylight robbery; doubling the price of a product is excessive right? Well, actually not so much. The list of overheads that need to come out from that Gross Profit is long and may mean that your net profit – after everything goes out – is more like 5% to 10%.
It’s worth noting that this is a retail industry average and your specific industry may be higher or lower than this.
You may hear other ‘Key’ pricing referred to as ‘Key and a half’ or ‘3 key’. These are simply 2.5x and 3x the wholesale or purchase cost price. It depends a lot on the industry your selling into but is certainly worth remembering.
Another common strategy is to base your prices on your nearest competitors pricing. There’s 3 ways that you can go about this; above them, below them or match them. There’s pros and cons for each and these need to be carefully balanced so as not to price yourself out of the market.
If you add value to your customers in some way then you could price your product(s) above that of your competitors. This may include things like free installation, try before you buy, free returns, extended warranties or similar. As long as you make the reasoning very clear then you can justify this additional cost to the customer.
Sometimes you are able to price below or undercut competitors. This may be because you have a better rate with your wholesaler or more efficient processes in place. This is slightly risky because you don’t want to instigate a ‘race to the bottom’.
A race to the bottom is where you and your competitor(s) continually reduce pricing to a level that is just not sustainable. Be wary of this unless you want a specific product to become a loss-leader.
On occasions this may be advantageous or you may be simply abiding by MRSP or RRP guides from your manufacturer or wholesaler – more on this later. Or it may be that you are price-matching as a guarantee, similar to what John Lewis do with their products. Again be cautious of this approach initiating a race to the bottom or setting prices too low to make any profit.
Handmade, niche and bespoke products that don’t have a very similar comparison could be based on their perceived value. This approach takes a fair amount of ground work to establish what your customers would be willing to pay based on the product(s). It may be that the product is so unique you could set your own pricing.
Think about Apple and their iPhone X. Their main competitor is Samsung but the products have some stark differences, therefore Apple can use Value based pricing. They know that their customers have a high level of brand loyalty and that they’ll cough up the money to get have the latest iteration in their pockets.
RRP or MRSP
Recommended Retail Price or Manufacturer’s Recommended Sale Price are amounts set by the wholesaler or manufacturer. They act as a guideline to help retailers set industry standard pricing. This pricing guide has usually been researched by the wholesaler/manufacturer or is a keystone (2x), key and a half (2.5x) or 3 key (3x) above their cost.
Remember that you don’t have to use the recommended prices. You could, if you wish, price products higher or lower. As long as you are able to make a good margin and continuing buying more products the manufacturers and wholesalers shouldn’t mind.
Recommended Pricing can, however, be very useful to show on product listings. Especially when your product is on sale or discounted. This is mostly for the psychological effect on the customer to nudge them into thinking they’re getting a deal (which they may well be).
Sites like Amazon and apps like Uber utilise dynamic pricing to capture as much market share (and profit) as possible. They adjust their pricing to take advantage of surges in interest, demand or declines in supply. In this way they can remain aggressively competitive within their industry. Check out sites like camelcamelcamel who track amazon prices during common sales day e.g. Black Friday for a perfect example of Dynamic Pricing.
This is a tough strategy to do manually and will take some time and effort to implement. Or you could use some software to track prices for you, on and off Amazon.
Everyone has seen the notebook sold for £4.99 or the hoover sold for £249.99. We all know that these are a single penny short of £5 and £250 but psychologically they look cheaper. This weirdness is due to the fact we process the first digit of the price and essentially skip the rest.
This is a very widely used and very successful marketing/pricing ploy that has demonstrable results. Ending prices in 9 or 5 is the ideal as this will reinforce the idea of ‘a deal’ in the minds of customers viewing them.
Conversely, if your product is a luxury item or has some sort of emotional connection to your target audience then feel free to round out those prices. Because the perceived value of the item is higher you can do away with the ‘Charm’ aspect needed for more logical or everyday products.
If your selling luxury wool ties you could comfortably price them at £50-£150 and not worry about adding charm pricing into the mix. This strategy works for large brands like Ted Baker, Gucci and Duchamp London. The perceived value of their products is higher and customers know that they’ll be paying ‘more’ for them.
Coupling a larger number to the retail price makes it look cheaper. Research has shown that a larger number next to your retail price is more likely to make your price look less. Sounds crazy right?
Think about buying a TV; initially the TV was priced at £1599.99, a little over your budget but it’s now priced at £1299.99. The difference is only £300 but the perception is that it’s substantially cheaper because of the previous higher number. There are caveats to this strategy though.
Remember that search engines keep a lot of information so if you’re artificially inflating the previous price or higher number and customers find out they’ll definitely be going elsewhere.
Fortunately, this tool doesn’t just work with prices. You could have a bit of text near or above the price that says how many of these products have already been sold this week/month/period of time. As long as that number is higher than the price shown then the psychological effect is the same. Look out for it yourself on your next shopping trip.
Don’t forget your overheads. Product pricing is an art form, it should be regularly reviewed and checked to ensure it remains competitive. But it should also cover your costs and give you a profit at the end of the month/quarter/year. Otherwise, what’s the point? 😉
Be wary of RPM agreements – Resale Price Maintenance. In the UK, having an agreement official or otherwise between supplier and retailer with a fixed minimum price or limitations on discounts may be in breach of Competition and Marketing laws. Further information on this is available here. But, needless to say, don’t sign or agree to anything that limits what price you can put on a product that you’re selling.
Also, don’t forget the shadow of ecommerce: the return & refund. You will at some point have products returned, some of these will be at your expense. Factoring a proportion of that risk in to your pricing is sensible, if you’re able to.
Test, Check & Retest
Of course nothing in business is set and that is just as true in Pricing. Product prices are changing regularly whether that’s due to changes in supply and demand, stock levels, seasonal changes, festive periods, etc. You need to keep track of what competitors are doing and what customers are buying, adjust your pricing and review it regularly.
There are a lot of tools on the market that can help with this from Google Analytics for data collection, HotJar for mapping to Google Optimize for A/B Testing. The world of retail is an unforgiving one and as retailers we need to be constantly questioning our decisions, processes, features, etc, etc. With consistent improvement we, as retailers, can remain competitive and relevant to our customers; which, ultimately, is the end goal.
This blog post was originally posted on the PushCommerce Resources Section.